The 104 bitcoin (worth $468,675 CAD) that Canadian crypto exchange QuadrigaCX “inadvertently” sent to its dead CEO’s cold wallets on February 6—a day after the company filed for creditor protection—was due to a “platform setting error.”

That and other news was included in Ernst & Young’s (EY’s) second report, released on February 20. EY is the court-appointed monitor in Quadriga’s Companies’ Creditors Arrangement Act (CCAA). At least now we know that the bitcoin wasn’t sent by somebody clumsily pushing a wrong button. Still, that single automation wiped out more than half of Quadriga’s hot wallet funds.

The rest of the hot wallet funds, worth $434,068 CAD, are now safe from Quadriga. On February 14, EY transferred the coins into cold wallets that it controls. The funds include 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether. But all of this is a mere drop in the bucket compared to the $250 million CAD owed to Quadriga’s 115,000 creditors—most of which is presumably lost forever.

Also in the report: Recall that Quadriga elected a new board following the death of its CEO Gerald Cotten on December 9. The new directors included Cotten’s widow Jennifer Robertson, her stepfather Thomas Beazley and a man named Jack Martel, who nobody knew too much about. Apparently, Martel stepped down on February 11.

And more money is needed to fund Quadriga’s CCAA process. EY and Quadriga’s law firm Stewart McKelvey have already burned through the nearly $300,000 CAD Robertson put up to initiate the process in January.

Additional money for the CCAA process—and ultimately for Quadriga’s creditors—will come from Quadriga’s payment processors, once they hand the money over to EY in the form of bank drafts. EY also has to get a bank to agree to accept the bank drafts, which is not an easy thing to do. Most banks want nothing to do with Quadriga’s money.

Costodian, a company created by payment processor Billerfy specifically to manage Quadriga’s funds, is holding $26 million CAD in bank drafts. After the Canadian Imperial Bank of Commerce froze those funds in January 2018, the Ontario Superior Court of Justice took control of that money, and in December, released the funds back to Costodian in the form of bank drafts issued by the Bank of Montreal (BOM).

According to EY, Costodian has so far handed over four BOM bank drafts totaling $20 million CAD. But it is waiting for a court order before releasing two more bank drafts.

One of those is for roughly $70,000 USD. These are personal funds belonging to Costodian’s principal Jose Reyes. EY has determined that those funds do indeed belong to Reyes, but he still needs to sign the check over to EY for disbursement.

The other BOM bank draft in question is for $5 million CAD. Of that amount, Custodian claims that $61,000 CAD also represent Reyes’ personal funds, and that $778,000 CAD is due to Custodian for unpaid processing fees.

Quadriga creditors don’t agree that Costodian should be paid these fees. To resolve the issue, EY notes that “a separate dispute resolution mechanism will be required during the course of these CCAA proceedings.”

In addition, Stewart McKelvey is holding 1,004 in bulk drafts totaling $6 million. These drafts were issued to 1009926 BC LTD, a payment processor run by a former Quadriga contractor. The problem is 1009926 BC LTD was dissolved in January 2018 for failure to file an annual report, so EY is looking to potentially restore the company.

EY is currently negotiating with the Royal Bank of Canada (RBC), where it hopes to deposit most of these checks. RBC is proceeding with caution, however.

According to EY, “a stranger to the CCAA proceedings, RBC has expressed hesitation to accept and disburse the BMO drafts, bulk drafts and future amounts, without direction and relief from the court.”

A hearing is scheduled for February 22 to give direction to the banks and to the third-party payment processors, so the funds can be freed up.

After that, another hearing to extend the stay of the CCAA proceedings is scheduled for March 5 in Halifax, where angry Quadriga creditors are looking to stage a protest. The protesters are urging the court to discontinue the CCAA proceedings and launch a criminal probe into Quadriga.

Update (February 21, 12:30 ET): I made some changes to clarify the amount of personal funds that Custodian principal Jose Reyes claims belong to him in two BOM bank drafts.

Nova Scotia Supreme Court Judge Michael Wood appointed law firms Miller Thomson and Cox & Palmer to represent the more than 115,000 Quadriga creditors, who are owed a total of $250 million CAD. Most of that money— $180.5 million CAD—is stuck in cold wallets after the company’s CEO died in India. He was the only one who held the keys.

To offer some background, a CCAA is a federal law in Canada that gives insolvent companies, such as Quadriga, time to restructure themselves and come up with a so-called plan of arrangement. It is not quite like a bankruptcy. A company can still operate and pay its employees during the proceedings.

When Quadriga was granted creditor protection on February 5, the judge issued a 30-day stay, to keep any lawsuits at bay. The court also appointed Ernst & Young as a monitor to oversee Quadriga’s business and help Quadriga put together its plan of arrangement.

If that plan is accepted by the court and the creditors, Quadriga users will likely be able to recoup some of their losses more expediently. If the plan is rejected, the stay will be lifted, and creditors can forge ahead with their lawsuits.

In the case of Quadriga, because there are so many creditors, the court felt it appropriate to find them legal representation. Three teams of lawyer vied for that position on February 12. Justice Wood reviewed their credentials and made his final decision today.

In his ruling, he explained that he chose Miller Thompson/Cox & Palmer because both firms have extensive insolvency experience. In the coming weeks, Cox and Palmer, which has an office in Halifax, will take the lead on the civil procedure and court appearances, while Miller Thompson, which is headquartered in Toronto, will handle “project management, communication and cryptocurrencies.”

The judge noted in his ruling that the firms’ proposal was “thought out carefully with a view to minimizing costs.” The team proposed an initial $250,000 cap on fees. They also said that they would communicate with creditors via social media, and that they would advocate for user privacy, something Quadriga users indicated was important to them.

Appointing a representative counsel and a stakeholder representative committee in complex CCAA proceedings is not unusual, the judge said. Such measures are usually undertaken when the group of stakeholders is large and without representation, many of them would struggle to effectively participate in the CCAA proceedings.

He also agreed with Quadriga’s lawyer Maurice Chiasson and others that assembling a committee of users to represent the broader group of creditors was something that needed to happen quickly.

“The anecdotal evidence at the hearing is that many people are extremely upset, angry and concerned about dishonest and fraudulent activity,” he wrote. “There are reports of death threats being made to people associated with the applicants. All parties agree that this user group needs representation as soon as possible.”

Quadriga’s stay of proceedings expires on March 7. A hearing is planned for March 5 to update the court on what progress Quadriga and its monitor Ernst & Young have made.

Update: According to an email Ernst & Young sent to creditors, Quadriga will, in fact, seek to extend the stay of proceedings. The monitor writes that “the stay of proceedings may be extended for any period that the Court deems appropriate. There is no standard timeframe for the completion of proceedings under the CCAA.”

Ernst & Young is posting updates to the CCAA proceedings on its website.

The news keeps getting worse for QuadrigaCX creditors. The Canadian crypto exchange has apparently jettisoned another $468,675 CAD worth of bitcoin into deep space.

On February 6, literally, one day after Quadriga applied for creditor protection, the exchange “inadvertently” sent 104 bitcoin to its dead CEO’s cold wallet, according to an initial report released by court-appointed monitor Ernst & Young (EY).

When Quadriga CEO Gerald Cotten died in India on December 9, he carried into the afterlife with him the keys to the exchange’s cold wallets, where $180 million CAD—oops, make that $180.5 million CAD—worth of crypto is stored. Unless Cotten springs from the grave, any crypto in those wallets is as good as gone.

You have to scratch your head till it bleeds on that one. Why was anyone at Quadriga allowed to touch those coins after the company applied for creditor protection? EY is now moving to safeguard the remaining crypto, a stash now down to 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether, worth $434,068 CAD. So, yes, basically, more than half the money in the hot wallets is now gone.

EY is also working to retrieve about $30 million worth of cash from nine Quadriga payment processors. So far, EY has yet to collect a dime, and one of the processors is stubbornly insisting that “it has the right to continue to hold funds in its possession pursuant to the terms of its agreement with the Applicants.”

Which payment processor would that be then? How about WB21? According to Robertson’s affidavit filed on January 31, WB21 is holding roughly $9 million CAD and $2.4 million USD of the exchange’s money. Even before EY took over, WB21 was “refusing to release the funds or respond to communications from Quadriga.”

A quick Google search reveals that WB21 has long been plagued by accusations that it is a scam. A year ago, Quadriga customers were complaining on Reddit that they were having trouble getting their wires from WB21. And, surprise, surprise, it also turns out, the U.S. Securities and Exchange Commission (SEC) is suing WB21’s CEO for fraud. (You can find the full SEC complaint here.)

Quadriga’s 115,000 creditors need proper representation. On February 14, three legal teams appeared in court to vie for the position of representative counsel. Nova Scotia Supreme Court Judge Michael Wood said he plans to have a final decision next week.

All this legal stuff is getting expensive. So far, Robertson has put up $250,000 CAD of the $300,000 CAD she promised in her affidavit to fund the CCAA process. And the funds are being gobbled up quick. Quadriga’s lawyer Maurice Chiasson said the money will run out in two weeks, if not or sooner.

Chiasson: Jennifer Robertson has put in 250-thousand of the 300-thousand she’s promised to fund this process so far. But that money will run out in the next 2 weeks if not sooner.

After that, where will the money come from? Likely, out of whatever funds EY pulls from those nine payment processors.

Meanwhile, more funny business is starting to surface. In her sworn affidavit, Cotten’s widow stated that she had no dealings with Quadriga prior to Cotten’s death. Yet, three Quadriga creditors (archive) claim they received wires from Robertson’s real estate company, Robertson Nova Property Inc. The wire transactions occurred in 2016 and 2017. This is interesting, given Jennifer only changed her name to Robertson in April 2017.

Did you know that if you wanted to cash out of Quadriga, you could opt to have actual boxes of cash dropped off at your door? That was an actual service (archive) Quadriga offered its customers. A few have suggested that the money may have come from bitcoin ATM machines that Quadriga operated.

I've been hearing more and more about @QuadrigaCoinEx users receiving significant withdrawals in the form of cash in nondescript packages by Canada Post. AFAIK, cash deposits were not an option. Why did Quadriga have so much cash on hand? @Bitfinexed#QuadrigaCX#seaglasstrust

Remember, Quadriga had no corporate banking. That is why, when you sold bitcoin for cash on the exchange or wired in money via one of Quadriga’s payment processors, your online wallet was credited with QuadrigaCX Bucks—not real bucks.

But who knew? I’ve been speaking to Quadriga creditors and some of them had no clue that the “CAD” they saw in their online wallets was basically Quad Bucks.

“Everyone knows CAD equals Quad bucks now, but I didn’t know that until after the implosion,” one creditor who preferred to remain anonymous told me. “I guess it was in the terms [and conditions], but it wasn’t marked Quad bucks.”

Some traders also told me that bitcoin sold for a premium on Quadriga. That meant, you could buy bitcoin on another exchange, such as Kraken, and then sell it for a profit on Quadriga. As an added incentive to move your crypto onto the exchange, Quadriga also offered free cash withdrawals, as long as you did not mind waiting two weeks or so for the money to hit your bank account. You had to pay a fee for express withdrawals.

Gerry Bot was pushing the price up on quad for YEARS! It was a giant carrot luring in new ignorant money into depositing BTC!

Finally, the Globe and Mail (outline) sent its investigative reporters to India, where Cotten and his wife celebrated their honeymoon just before Cotten died. People are still wondering if his death was staged. “That Mr. Cotten did indeed die is a certainty among police and medical professionals in India, and The Globe reviewed hotel, hospital and embalming records that give no suggestion of anything abnormal,” the Globe writes.

But why was Cotten’s body taken from the hospital where he died back to the hotel where he had been staying? (According to Cotten’s death certificate, Fortis Escorts Hospital was the place of death.) Partly because of this, Simmi Mehra, who works at Mahatma Gandhi Medical College & Hospital, refused to embalm the body.

She told The Globe: “That guy [a representative from the hotel] told me the body will come from the hotel. I said: ‘Why the hotel? I’m not taking any body from the hotel, it should come from Fortis.”

The Globe and Mail report also reveals tragic details of the oft-overlooked Angel House orphanage that Cotten and Robertson sponsored. Apparently, the money they donated only paid for building materials. Several doors are still missing from the structure, including one to the toilet. And the operator of the orphanage is sinking into debt.

The orphanage appears to be yet another example of the wake of destruction that Cotten, who otherwise lived as though money were no object, carelessly left in his passing.

QuadrigaCX, the largest cryptocurrency exchange in Canada, has gone belly up, leaving 115,000 of its customers and all of Canada wondering, “What the hell just happened?”

Some $180 million CAD worth of crypto seemingly vanished when Gerald Cotten, the founder of the exchange, died in India at the age of 30, taking with him the keys to the exchange’s offline cold wallets—which, for Quadriga customers, essentially translates into “all of your money is gone.” The exchange’s customers are collectively owed $250 million CAD in both crypto and fiat.

As is often the case, it’s never a matter of what just happened. If you dig deep enough, you’ll find that the funny business—and there was plenty of it—started long ago.

I’ve cobbled together what I could find on Quadriga and assembled it into a timeline. But before we delve into that, let me introduce you to a few more characters.

Jennifer Robertson is Cotten’s widow, a woman he bequeathed all of his worldly belongings to shortly before his death. In addition to becoming the largest shareholder of Quadriga, she now owns a yacht, an airplane, and millions of dollars worth of property—assets that hordes of jilted Quadriga customers feel they now have a right to.

And then there’s Quadriga co-founder Michael Patryn. Some people—actually, a lot of people—believe Patryn is convicted money launderer Omar Dhanani and that he changed his name to disguise his criminal past after the U.S. deported him back to Canada. I am not saying Patryn is Dhanani. I’ll leave you to draw your own conclusion. But I’d be remiss not to include Dhanani’s earlier dealings on my timeline.

Also, a few words on how the exchange handled its banking. Quadriga had no company bank accounts. If you wanted to purchase crypto on the exchange, you would send your money to one of Quadriga’s third-party payment processors via a bank wire, an Interac e-transfer or a bank draft. Once your fiat was received, your Quadriga account would then be credited with QuadrigaCX Bucks (archive), a digital stand in for Canadian dollars.

According to the exchange’s website:

“All account fundings are considered to be purchases of QuadrigaCX Bucks. These are units that are used for the purposes of purchasing Bitcoin or other cryptocurrencies. QuadrigaCX Bucks are NOT Canadian Dollars. Any notation of $, CAD, or USD refers to an equivalent unit in QuadrigaCX Bucks, which exist for the sole purpose of buying and selling Bitcoin and other cryptocurrencies.

QuadrigaCX is NOT a financial institution, bank, credit union, trust, or deposit business. We DO NOT take Deposits. We exist solely for the purposes of buying and selling cryptocurrencies.”

Billerfy Labs, owned and operated by José Reyes, was one of Quadriga’s payment processors. Under a shell company called Costodian, Reyes set up accounts at Canadian Imperial Bank of Commerce (CIBC), one of the top banks in Canada. Quadriga customers would send their money to one of these accounts.

When you wanted to redeem your Quad Bucks, you would send a request to Quadriga. The exchange would forward your request to Billerfy, which would then aggregate withdrawal requests before moving large sums of money (say, $100,000 CAD at a time) out of Costodian’s accounts at CIBC to an account held by Billerfy at another bank. And from there, Billerfy would then wire the funds directly to you.

In a nutshell, that is how Quadriga moved money. It is also how the exchange got itself into a sticky situation during the crypto boom period of 2017 to 2018 when millions of dollars began pouring into Billerfy/Costodian accounts at CIBC. Banks have to comply with strict anti-money-laundering (AML) policies. This makes them averse to anything that looks like, well, money laundering.

And with that, our story actually begins a decade and a half ago.

Timeline

October 26, 2004 — The gig is up for Omar Dhanani. The 20-year-old is one of 28 people arrested in connection with Shadowcrew, an online bazaar trading in stolen credit and debit card numbers, bank account numbers and ID’s. These items were bought primarily with e-gold, a digital currency backed by gold and silver. Criminals were drawn to e-gold because it allowed them to transfer funds with little more than an email address. (Secret Service press release)

On October 4, 2014, going by the moniker “Voleur” (French for thief), Dhanani boasted in a chat room that he moved between $40,000 and 100,000 a week.

[An earlier version of this timeline stated that Dhanani was 22 at the time of his arrest. He was 22 when he pled guilty to the charges more than a year later. A Globe and Mail (outline) states he was 20 at his arrest, so I’ll go with that.]

October 29, 2004 — After news of the Shadowcrew bust hits the streets, users on ponzi-promotion forum TalkGold begin discussing the possibility that “Patryn,” a prolific user on the forum, is actually Omar Dhanani. The majority of these ponzi schemes (aka. high yield investment programs) accepted e-gold, which Dhanani processed for a fee.

E-gold was shut down in 2009, but it paved the way for other digital currencies, like Liberty Reserve, to come in and take its place in underground economies.

May 5, 2005 — In a 2005 forfeiture case, which appears to be related to his previous Shadowcrew arrest, Dhanani uses the alias “Omar Patryn.” Another claimant in that case is Nazmin Dhanani, a relative of Dhanani’s. (If you keep reading, Nazmin’s name will spring up again on this timeline in association with a “Michael Patryn.”)

If we were in front of a jury, with just this, and the burden was preponderance of the evidence — hard to imagine a jury concluding anything other than that the two people are one and the same, in my personal opinion.

November 18, 2005 — Dhanani pleads guilty to conspiracy to commit credit and bank card fraud and ID document fraud related to his Shadowcrew arrest a year earlier. (US. DOJ, Indictment, Wired) He is sentenced to 18 months in prison. (Globe and Mail)

August 9, 2006 — Dhanani, using the alias “Omar Patryn,” is arrested for driving under the influence. He gets two years’ probation and 13 days in jail. (Case summary)

April 4, 2008 — After his deportation to Canada, Dhanani returns to doing what he does best: moving money. He registers Midas Gold Exchange (archive) in Alberta under “Omar Patryn.” Midas specializes in selling digital currencies, primarily Liberty Reserve.

Liberty Reserve was a Costa Rica-based private currency exchange with its own digital currency, LR. Users could buy LRs for $1 apiece and use them to pay anyone else who had a Liberty Reserve account. The system attracted scores of criminals, ultimately leading to Liberty Reserve being shut down in 2013.

A number of Midas Gold Exchange customers are displeased with Dhanani/Patryn’s level of service. They register their grievances on Complaints.com.

October 22, 2009 — “Michael Patryn” registers MPD Advertising Inc. in Vancouver, B.C. Nazmin Dhanani is listed as an officer of the company. (If you recall, the name Nazmin appeared earlier in this timeline in association with “Omar Patryn.”) MPD dissolves on August 18, 2013. (Companies of Canada)

May 27, 2013 — Liberty Reserve is shut down by the US government, and its founder is arrested for running a massive money laundering enterprise. (DOJ)

August 21, 2013 — Michael Patryn and Lovie Horner register World BJJ Corporation in Vancouver. (Government of Canada.) Horner will later become a Quadriga shareholder. This shows that she had an established relationship with Patryn. Court documents filed in 2019, refer to her as Patryn’s “partner.”

October 31, 2013 — The final curtain descends on Liberty Reserve when its co-founder pleads guilty to money laundering and operating an unlicensed money transmitter business. (DOJ.) By now, a new digital currency is starting to make headlines. And unlike e-gold and LR, it is decentralized, meaning no central party controls it. In a 2015 video posted on Youtube, Patryn says he got involved in bitcoin in mid-2013.

November 4, 2013 — QuadrigaCX is incorporated in British Columbia. Michael Patryn is a co-founder along with Gerald Cotten, 25. (Affidavit.) One of the big stumbling blocks bitcoin exchanges in Canada face is getting banking.

“If you recall, back in the summer of 2013, there really weren’t many options here in Canada for people to buy and sell bitcoins…There was one exchange [Cavirtex] that was pretty much leading the pack….and then, other than that, you pretty much had to send a wire over to Japan [a reference to now-defunct bitcoin exchange Mt. Gox], if you wanted to buy Bitcoin…. You couldn’t hook up your bank account anywhere, it was just such a challenge.”

December 23, 2013 — Just before the platform launches, Quadriga registers as a money services business (MSB) with FINTRAC, the main supervisory body that oversees and regulates Canada’s financial services industry. According to Bitcoin Magazine, “While it isn’t strictly required by law, such registration is perceived by banks as a sign of legitimacy, and registration has minimized the number of banking issues [Quadriga] has had to face.”

December 26, 2013 — QuadrigaCX launches in beta with a staff of five. Website architect Alex Hanin continues to oversee maintenance of the platform via Connect Development Ltd, a business registered in the U.K. (The Georgia Straight)

January 30, 2014 — Boasting 1,000 users, QuadrigaCX moves out of beta. The exchange is set to add dogecoin and litecoin on top of bitcoin, which it already lists. In addition, Quadriga launches Canada’s second Bitcoin ATM, where users can exchange cash for bitcoins. The plan is to open Bitcoin ATMs all over Canada. (The Georgia Straight)

April 17, 2014 — Patryn makes the final candidate list for the Bitcoin Foundation, a nonprofit advocating the use and development of Bitcoin.

[Update: a previous version of this timeline incorrectly stated that Francis Pouliot nominated Patryn. As a volunteer for the Bitcoin Foundation, part of Pouliot’s job was to organize the election process and publish candidate information on the nonprofit’s website. He did not actually nominate Patryn. I apologize for the error.]

May 14, 2014 — In another bank workaround, Quadriga announces that it will accept gold. Users can deposit or withdraw funds from their accounts in gold bullion. Patryn tells Bitcoin Magazine: “As we have a great deal of past experience with gold trading, it was not a particularly large leap to enable XBT/XAU trades on our website.”

Accepting gold means that Quadriga has to actually store the gold. Bitcoin Magazine appears convinced Quadriga is up to the task. The pub writes:

“Anything can be lost or stolen, of course, but QuadrigaCX is big on security. Nobody wants their funds gambled on a fractional reserve system, so all deposits are backed by gold held in their vault, which the directors have years of experience storing and securing. Full details on their storage system are obviously unavailable, but their known security measures are comforting: their office itself lies behind a barred entrance, and neighbors the office of their security company.” [Emphasis mine.]

October 6, 2014 — Whiteside Capital Corporation, a shell company linked to Quadriga, is incorporated in British Columbia. As a holding company, it has no employees or contractors. (Affidavit)

November 12, 2014 — Ancetera Networks LTC., another shell company linked to Quadriga, is incorporated in British Columbia. Since the company’s only purpose is to hold shares, it also has no employees or contractors. (Affidavit)

January 26, 2015 — Ancetera Networks changes its name to Fintech Solutions. (BC Laws). Lovie Horner is listed as an executive (Bloomberg). Anthony Milewski, William Filtness, and Natasha Tsai, are also directors. (Business Wire)

January 31, 2015 — Despite the positive media coverage, Quadriga is struggling to keep its business afloat. According to a prospectus filed this year, the trading platform pulled in a mere $22,168 CAD in revenue during the three-month period ending January 31, 2015. The company’s net loss for the period was almost $90,000 CAD. (Globe and Mail)

February 5, 2015 — According to a listing in S&P Global, Lovie Horner joins Quadriga as VP of business development. She has a background in fashion design.

February 23, 2015 — Two of Canada’s biggest crypto exchanges shutter, making Quadriga the biggest crypto exchange in Canada. Vault of Satoshi turned off its lights on February 17, and now Cavirtex says it plans to wind down. (Bitcoin Magazine)

In an episode of the #BlockTalk podcast, Patryn explains that a reverse takeover will eliminate the paperwork involved with getting listed the usual way—via an IPO. The exchange is set to trade under “Quadriga Fintech Solutions.” Public trading is expected to commence with the Canadian Securities Exchange (CSE) by early April.

Quadriga also boasts it will undergo a full financial audit by Wolrige Mahon LLP. “We’re excited to be able to provide an unparalleled level of transparency by merging legacy financial audits with innovative blockchain technology,” Cotten tells Bitcoin Magazine.

But after the big announcement, things go directly downhill. Quadriga burns through all of its investment capital, and Patryn brings a lawsuit against Robert Lawrence, the Vancouver businessman he and Cotten enlisted to help them take the company public.

“In Mr. Patryn’s telling, Mr. Lawrence failed to perform his duties properly and the company was never able to list. Mr. Lawrence raised a total of $850,000, of which $150,000 came from Mr. Patryn. But by June, 2015, the company had run out of money and lost 45 percent of its market share, according to Mr. Patryn’s statement of claim. Mr. Patryn said much of the money had to be spent correcting the “poor quality” of Mr. Lawrence’s work. Investors pitched in another $600,000, including $200,000 from Mr. Patryn, to keep the company from failing.

By February, 2016, Quadriga gave up on its plans to list and severed its relationship with Mr. Patryn, he said in court documents, owing to his perceived association with Mr. Lawrence. “News of his termination from QCX has materially and negatively affected his ability to secure similar work in the financial technology industry,” Mr. Patryn’s statement of claim read.

In a response, Mr. Lawrence denied the allegations and said Mr. Patryn approached him, not the other way around. Moreover, Quadriga’s failure was its own fault – and Mr. Patryn was the company’s “controlling mind,” he asserted. (Mr. Cotten is scarcely mentioned in the lawsuit.) Mr. Lawrence sought to have it dismissed. No filings have been made in the case since 2016. Mr. Lawrence could not be reached for comment.”

April 16, 2015 — With great enthusiasm, Quadriga renews its plans to install Bitcoin ATMs across Canada. According to Buying Bitcoin, “These new BitXATM machines also will be modified to allow for direct cash deposits and withdrawals from customers’ QuadrigaCX balances.” But like many of Quadriga’s plans, none of this actually happens.

[Where did Quadriga put all that cash if it had no banking? Read my update Quadriga, Quadriga, Quadriga, which talks about how some Quadriga customers claim to have been receiving withdrawals in the form of actual boxes of cash delivered to their door.]

September 29, 2015 — According to SEDAR, Quadriga publishes its last “certification of interim filings.” In other words, its last financial audit.

November 12, 2015 — Quadriga announces the formation of a blockchain R&D lab—Canada’s first! However, like past Quadriga projects, this one is long on hot air and short on follow through. According to the press release, the lab’s first task is to develop a “platform with two core functions: handling the onboarding and client data management for financial crime systems using the Blockchain and facilitating machine to machine (M2M) payments with Internet of Things (IoT) providers for connected cities.”

February 29, 2016 — At this juncture, Patryn has supposedly left Quadriga. The reason, he tells Globe and Mail, is because he disagreed with Cotten’s decision to call off listing the company. Quadriga makes a passing mention on Reddit that Patryn is gone, but there is no formal announcement. On the heels of Patryn’s departure, Anthony Milewski and Lovie Horner also resign. (Business Wire)

March 8, 2016 — Quadriga is banned from selling securities altogether whenthe British Columbia Securities Commission issues a cease trade order. Apparently, Quadriga has not submitted a financial audit for the year ended October 31, 2015. A “Management’s Discussion and Analysis” is also missing.

March 18, 2016 — Director William Filtness and chief financial officer Natasha Tsaistep down from Quadriga. Cotten is now a one-man band, managing the majority of work from his laptop, wherever he happens to be. The servers are in the cloud on Amazon Web Services. According to court documents filed in January 2019, he also “took sole responsibility” for handling the exchange’s coins.

Robertson's affidavit gives an inside look at how these crypto exchanges operate. Cotten (her husband and the sole officer of Quadriga till his death on 12/9/18) was a one man band. He ran the exchange from his laptop from wherever he happened to be. https://t.co/6iivVMpbe1

April 5, 2017 — Cotten’s partner, Jennifer Kathleen Margaret Griffith changes her last name to Robertson. (Royal Gazette.) According to CBC, she has also used the name Jennifer Forgeron in the past.

June 2, 2017 — Quadriga announces on Reddit (archive) that it has lost some 67,000 ether (ETH) worth about $14 million USD due to a software glitch. The exchange says:

“While this issue poses a setback to QuadrigaCX, and has unfortunately eaten into our profits substantially, it will have no impact on account funding or withdrawals and will have no impact on the day to day operation of the exchange.”

August 21, 2017 — Quadriga customers begin reporting delays in redeeming their Quad Bucks. In emails with clients, Cotten blames the “Canadian banking cartel” for the wire delays, saying they are out to “stifle bitcoin adoption” in the country. (Globe and Mail)

September 26, 2017 — On behalf of Billerfy, José Reyes applies to open three commercial banking accounts at the Canadian Imperial Bank of Commerce (CIBC) Beaver Creek Branch. (Interpleader order)

November 28, 2017 — CIBC’s anti-money laundering department reviews the Reyes’ account opening documentation at the Beaver Creek Branch. After the bank learns that Billerfy is a money service business, it closes the accounts. (Interpleader order)

November 30, 2017 — Reyes applies to open two small business banking accounts at CIBC’s Bayview Village Branch on behalf of Costodian, a shell company. One is an “expense account,” the other is a “transaction account.” Reyes tells the bank that Costodian is “[n]ot related to Billerfy’s CMO business.” (Interpleader order)

December 17, 2017 — After a spectacular run up, bitcoin reaches on all time high of nearly $20,000 USD. According to the Globe and Mail, $1.2 billion worth of bitcoin traded on Quadriga in 2017. The exchange took a commission on every trade.

December 4, 2017 – February 20, 2018 — At the height of the crypto bubble, millions of dollars flood into bank accounts that Reyes opened up at CIBC to collect Quadriga funds. In three months, 388 depositors make 465 deposits to Costodian’s “transaction account” in the total amount of $67 million CAD. (Some of the money is eventually withdrawn, leaving roughly $26 million CAD.)

December 22 – 28, 2017—Reyes transfers $2.3 million CAD from Costodian’s “transaction account” to his personal checking and savings accounts. He admits to CIBC he did not notify Quadriga prior to transferring the money to his personal accounts. (Interpleader order)

January 8, 2018 — CIBC is unsure of who the $26 million CAD belongs to, so it freezes two accounts belonging to Costodian and José Reyes. In an interpleader order, the bank asks the court to take possession of the funds and decide who they belong to —QuadrigaCX, Costodian or the depositors. Cotten fights back, claiming CIBC had no right to freeze the funds. Quadriga has already credited depositors with Quad Bucks.

February 8, 2018 — According to the Globe and Mail, a new company 700964 NB is registered in New Brunswick as “part of a network of entities that helped move millions of dollars around so Quadriga could take deposits and facilitate withdrawals, sometimes in the form of physical bank drafts, for its clients.” Aaron Matthews, Quadriga’s director of operations, and Sarah-Lynn Matthews are listed as owners, but the address on the registration leads to a rickety trailer in a mobile home park.

February 16, 2018 — CIBC is still trying to sort out who the $26 million CAD belong to. The bank asks Jose Reyes (the person who controls the frozen accounts) if it is okay to speak to someone at Quadriga. Reyes declines, because Cotten had indicated that he was not interested in speaking with anyone at CIBC. (Interpleader order)

June 8, 2018 — Cotten and Jennifer Robertson legally marry, according to Globe and Mail, who obtained the marriage certificate. Although, several Reddit posters, who claim they saw Robertson’s Facebook page, insist the couple got married on October 8, 2018.

July 2018 — Michael Patryn hires Reputation.ca to remove negative content about him on Complaints.com, where he is referenced as a money launderer. Patryn later sues Reputation.ca for not moving fast enough, according to the Globe and Mail, who reviewed the court documents.

November 9, 2018 — The Ontario Superior Court grants CIBC an interpleader order allowing the court to take control of Quadriga/Custodian’s $26 million CAD in funds until the ownership of the funds can be established. (CoinDesk) (Globe and Mail)

November 27, 2018 — Cotten signs a will, leaving all his belongings to Robertson, including several properties, a 2017 Lexus, an airplane, a 2015 Mini Cooper and a 51-foot Jeanneau sailboat. He goes a step further and details the distribution of his assets should Robertson not survive him, even specifying that $100,000 CAD go to his dogs.

After some digging, CBC learns that Cotten’s widow has a company called Robertson Nova Property Management. Apparently, she, her husband and her company bought 16 properties between May 2016 and October 2018, worth $7.5 million CAD.

“Little is known about Ms. Robertson, who appears to have used three different surnames since she began buying real estate in Nova Scotia with Mr. Cotten in 2016,” reports Globe and Mail in February 2019.

November 30, 2018 — Cotten and wife Jennifer Robertson arrive in New Delhi, India. They have come to the country to celebrate their honeymoon and participate in the opening of an Angel House orphanage they sponsored. (Globe and Mail)

December 3, 2018 — Physical cash pickups up to $2,500 now available for Quadriga customers. According to the Reddit (archive) announcement: “We have partnered with selected stores to provide local cash pickup — as we have just started exploring this new method, only one store in Montreal, QC has been set up at the moment. We have another store going live next week in Cornwall, ON and hopefully many more.”

We are excited to announce our new withdrawal method: Physical Cash Pickup. We have partnered with selected stores to provide local cash pickup. To find out more please check out the link: https://t.co/qoInt3PXXI

December 4, 2018 — Quadriga announces on Reddit (archive) that Ontario Superior Court is releasing the funds that CIBC held “hostage” to Costodian, its payment processor. Quadriga writes: “According to our counsel, the funds should be paid out by the end of this week.” However, new problems ensue when the court issues the funds back to Costodian in the form of bank drafts, which Custodian has trouble finding another bank to accept.

December 8, 2018 — At 5:15 p.m. Cotten and Robertson land in Jaipur, where they plan to spend four nights at the high-end Oberoi Rajvilas for $923 a night. Soon after the couple check in, Cotten gets a belly ache. At 9:45 p.m., he checks into Fortis Escorts Hospital. He spends the night at the hospital in a private room. (Globe and Mail)

December 9, 2018 — Cotten’s condition deteriorates. At 7:26 p.m. he is declared dead due to complications of Crohn’s disease. The cause of death is cardiac arrest. (Globe and Mail.) Robertson withholds the news from Quadriga customers for more than a month. Meanwhile, the exchange continues to accept deposits. (Affidavit)

She later tells The Globe: “That guy [a representative from the hotel] told me the body will come from the hotel. I said: ‘Why the hotel? I’m not taking any body from the hotel, it should come from Fortis.”

December 10, 2018 — SMS Medical College issues an embalming certificate for Cotten’s body. Sangita Chauhan, who heads the anatomy department there, does not actually see the body. Instead, a junior staffer handles the processing. The body is picked up by staffers at Cotten’s hotel, Oberoi. (Globe and Mail)

December 10, 2018 — Robertson checks out of the Oberoi and heads back to Canada “with the body,” according to the Globe and Mail.

December 13, 2018 — Cotten’s death is registered with the Government of Rajasthan Directorate of Economics and Statistics. “The death certificate, obtained by The Globe, lists his “address at time of death” as the Oberoi Rajvilas.” However, a death certificate, later obtained by CoinDesk, lists his “place of death” as Fortis Escorts Hospital.

December 13, 2018 — The Angel House orphanage that Cotten and Robertson funded opens in Venkatapuram, India. The money the couple donated only paid for materials. The building is still missing several doors, including one to the bathroom. And the man running the orphanage is going into debt. (Globe and Mail)

December 14, 2018 — A funeral service is held for Cotten at J.A. Snow Funeral Home in Halifax Nova Scotia. (Reddit)

Meanwhile, by December, withdrawals from Quadriga have all but ground to a halt. Reddit /r/QuadrigaCX has become awash with people complaining they cannot get their money out of the exchange. (David Gerard.)

My last Oct withdrawal marked Complete on Dec.27th while still not been received yet. A withdrawal of 0.25 Bitcoin on Jan. 21th is still pending. Very annoying!!! I am not able to withdraw any crypto or QCX bucks from the platform. Please do update what's going on.

January 14, 2019 — Quadriga finally announces that its CEO is deceased. Cotten’s widow posts an announcement on the Quadriga website explaining that Cotten passed away in India while opening an orphanage. To quell any suspicions that he ran off with everyone’s money, she bestows her husband with a host of virtuous qualities:

“Gerry cared deeply about honesty and transparency—values he lived by in both his professional and personal life. He was hardworking and passionate, with an unwavering commitment to his customers, employees, and family.”

Robertson also recommends that Quadriga’s head of operations Aaron Matthews assume the role of interim president and CEO. Later, it appears Matthews denies he is CEO.

I spoke with Aaron Matthews (Listed in Jennifer Robertson's affidavit), who is currently a contractor for @QuadrigaCoinEx. He is NOT the interim-CEO. He gave some insight into the capacity of his work at Qcx and his relationship with Gerald. #QuadrigaCXpic.twitter.com/YlUnKCdfcV

Meanwhile, Quadriga’s customers are now having trouble getting their crypto out of the exchange. There is no reason for this. Crypto should move directly from the exchange to the customer. This leads to concern that maybe the funds aren’t actually there.

"Has anyone been able to move any crypto off Quadriga in the last 24hrs…?"

January 22, 2019 — Robertson sends a petition to the Supreme Court of British Columbia requesting a shareholder meeting to appoint new board members to Quadriga, because effectively, the company has no board.

January 25, 2019 — Quadriga holds a shareholder meeting (Michael Patryn, Lovie Horner, and Jennifer Robertson). Robertson, her stepfather Thomas Beazley, and a man named Jack Martel are appointed as new directors. They decide to suspend Quadriga’s operations, but hold off on sharing this news with Quadriga’s customers. (Affidavit)

January 26, 2019 — The newly appointed directors instruct that the platform be paused. According to affidavit Robertson files on January 31, “The pause will mean that future trades of cryptocurrency will be temporarily suspended, including the settlement of cash or the trading of currency between users.”

January 28, 2019 — The board meeting was on a Friday. All weekend long, anxious Quadriga customers wait to hear some news. On Monday, they wake to find a large notice on the exchange’s website indicating the site is down for maintenance. (CoinDesk)

January 29, 2019 — Cotten’s widow moves to protect her property. According to the Chronicle Herald, at the end of January, “Robertson took her deceased husband’s name from the ownership of the four properties, worth a combined $1.1 million, then took out collateral mortgages on all four in favour of a trust of which she is a trustee, and finally transferred ownership of at least two of those properties to that trust.” The name of the trust is the Seaglass Trust.

January 31, 2019 — Quadriga’s website remains in “maintenance mode” for three long, nail-biting days. Then a new notice appears, basically stating the company is bankrupt. Quadriga’s board members have applied for creditor protection (affidavit) with the Nova Scotia Supreme Court. A preliminary hearing is set for February 5.

Buried in the notice is alarming news. Quadriga is scrambling to locate its cold wallets. Most exchanges typically keep the majority of their crypto in offline wallets for security reasons. The situation, is akin to a bank misplacing all of its money.

We lost the $150 million in cryptocurrencies that we held for customers because our founder died and he was the only one with the passwords to the wallets. Welcome to the financial future! https://t.co/81auPh1lxZ

February 5, 2019 — Represented by Maurice Chaisson, a lawyer with Stewart McKelvey, Quadriga appears in court for its creditor protection hearing. The court appoints Ernst & Young (EY) as a monitor in charge of tracking down the $250 million CAD collectively owed to Quadriga’s customers. The exchange is also granted a 30-day stay, meaning customers are unable to sue the exchange in that time. (CoinDesk.) Quadriga updates its website with a new announcement (archive.)

Here’s an example of Quadriga’s bookkeeping. These are apparently bank drafts. According to Chiasson they are now, “Off the stove.” pic.twitter.com/yvglesMHyM

February 5, 2019 — With keys to the exchange’s cold wallets gone missing, many are wondering if Cotten staged his death. CoinDesk posts a death certificate with Cotten’s name misspelled as “Cottan.” Apparently, fake death certificates are easy to come by in India.

February 7, 2019 — Fortis Escorts, the hospital in Jaipur, India where Cotten passed, releases a statement confirming his death. Cotten arrived the hospital in a “critical condition” with “pre-existing Crohn’s disease and was on monoclonal antibody therapy every 8th week.” He was diagnosed with septic shock and other horrible things. (CoinDesk)

February 8, 2019 — CoinDesk reports that crypto funds were moving through the Quadriga platform up to Cotten’s death. In a series of transactions sent from the exchange’s internet-connected hot wallets, more than 9,000 ETH moved from Quadriga to a handful of other exchanges, including Binance, Bitfinex, Kraken and Poloniex. Most of that crypto was transferred the week before Cotten’s death, but there is no telling who initiated the transactions—the exchange, its customers, or both.

February 8, 2019 — The Ontario Securities Commission announces that it will look into Quadriga. (Reuters). The news comes just days after the British Columbia Securities Commission said it had no reach into the exchange. (Reuters)

February 11, 2019 — Jack Martel resigns from Quadriga’s board of directors, leaving Jennifer Robertson and her stepfather Thomas Beazley as the only two directors.

February 12, 2019 — Things just keep getting worse for Quadriga creditors. In its initial report, the monitor reveals that on February 6—a day after Quadriga was granted creditor protection—the exchange “inadvertently” sent 104 of the bitcoin it was holding in its hot wallets (worth $468,675 CAD) to its dead CEO’s cold wallet.

The hot wallets now contain 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether—worth $434,068 CAD, less than half the value of what they held before.

February 14, 2019 — Nova Scotia Supreme Court Judge Michael Wood appoints law firms Miller Thomson and Cox & Palmer to represent the more than 115,000 Quadriga creditors throughout the CCAA proceedings. Miller Thomson is the lead counsel located in Toronto; Cox & Palmer is the local counsel. The scope of their work is spelled outhere.

February 20, 2019 — In its second monitor report, Ernst & Young reveals that the sending of 104 bitcoin to Quadriga’s cold wallets earlier was due to a “platform setting error.” The CCAA process is also running low on funds. EY is in possession of millions of dollars in bank drafts from Quadriga and its payment processors. The problem is getting banks to accept the funds. (Read my story here.)

February 22, 2019 — The court issues a “Banking arrangement order” at the request of Ernst and Young (EY). The order offers limited protection to the Bank of Montreal (BOM) and the Royal Bank of Canada (RBC) for handling bank drafts related to Quadriga and its payment processors. And, with regard to a disputed $5 million CAD bank draft, $60,958.64 of that is to be paid to Costodian principal Jose Reyes, because EY determined that these were his personal funds. And $778,213.94, which Custodian claims it is owed in unpaid transaction fees, will go into trust account pending further order of the court.

February 25, 2019 — Robertson files a second affidavit. In it, she asks for an extension of the stay of proceedings in the CCAA and the appointment of Peter Wedlake, a senior vice president and partner at tax and accounting firm Grant Thornton, to the position of chief restructuring officer (CRO) for Quadriga. The CRO would fill the director position left vacant by Jack Martel stepping down on February 11. Thornton apparently has cryptocurrency experience and is a “certified bitcoin professional.”

February 28, 2019 — Globe and Mail (archive) tracks down a booking photo of Omar Dhanani and posts it alongside a screengrab of Michael Patryn taken from a Youtube video off the internet. The two faces look strikingly similar.

March 13, 2019 — The law firm representing Quadriga in the CCAA proceedings tells the court that it is stepping down, effective immediately. Stewart McKelvey had been representing both Quadriga and the estate of Quadriga’s dead CEO, which led to concerns of a potential conflict of interest from the monitor and the representative counsel. Stewart McKelvey will continue to represent Robertson’s estate.

March 19, 2019 — Bloomberg straight out announces that Michael Patryn is Omar Dhanani. Reporters tracked down the actual documents showing two name changes. “Patryn changed his name from Omar Dhanani to Omar Patryn with the British Columbia government in March 2003. Five years later, he registered a name change to Michael Patryn in the same Canadian province.”

March 19, 2019 — The representative counsel in Quadriga’s CCAA now have a voice to listen to. Miller Thomson and Cox & Palmer appointed a steering committee to help them represent 115,000 of the exchange’s creditors. The members include: Parham Pakjou, David Ballabh, Eric Bachour, Ryan Kneer, Magdalena Gronowska, Eric Stevens and Nicolas Deziel, with Richard Kagerer and Marian Drumea assigned as alternates.

April 18, 2019 — Next hearing scheduled.

# # #

This timeline is a work in progress. If you see anything that is missing, inaccurate or needs further clarification, let me know. You can also DM me on Twitter. And please consider supporting my work on Patreon!

QuadrigaCX customers’ worst fears have come to pass. The Canadian exchange is officially insolvent, and all the crypto is gone—well, most of it anyway.

On January 31, after filing for creditor protection, Jennifer Robertson, the widow of the exchange’s now-deceased CEO Gerald Cotten, filed an affidavit with the Supreme Court of Nova Scotia. As it turns out, Cotten was the only person who held the keys to the exchange’s cold wallets—encrypted wallets where cryptocurrency is kept offline. When he died in December, all that crypto became inaccessible.

According to the affidavit, QuadrigaCX owes 115,000 customers some $250 million CAD ($190 million USD) in both crypto and fiat. Roughly $192 million CAD ($147 million USD) were in crypto assets, most of it in the cold wallets.

So let me get this straight:

No one knows the cold wallet addresses for Quadriga or if they even exist?

In addition to the lost crypto, $30 million CAD is currently held by payment processor Billerfy. Three other third-party payment processors are holding a combined $565,000 CAD. And another $9.2 million USD is stuck inside WB21—a money transfer service that, surprise, surprise, is being sued by the U.S. Securities and Exchange Commission (SEC) for fraud.

But here is where things get strange. Two weeks before he died, Cotten signed a will leaving $100,000 CAD for his two dogs, according to the Globe and Mail (archive.)

I’m not insinuating any foul play here, but let’s go over what we have: Cotten and Robertson supposedly got married two months before his death. Cotten writes up a will to make sure his dogs are taken care of and Robertson takes ownership of 43% of the shares of Quadriga Fintech Solutions, the parent company of QuadrigaCX, should anything awful happen to him. Once that’s all said and done, something awful happens. Cotten goes off to India to help needy children (so nice of him) and dies.

A month later, Robertson posts an announcement on the exchange’s website telling everyone the company’s CEO is dead. He was a kind, honest, upstanding, guy…after all, he sponsored an orphanage. And then later: Oh, and by the way, all the money is gone, because only Gerald knows where he put it.

[Update: A new twist to this plot may be developing. One Reddit user claims to have found the QuadrigaCX litecoin cold wallet addresses—and the funds appear to be on the move.]

Elsewhere in the news, Canadian social media startup Kik plans to fight an expected SEC enforcement action over an initial coin offering (ICO). (Read my coverage here.) Kik raised $100 million in 2017 by selling its kin token. In a response to a Wells notice from the SEC, Kik argues that its token is a currency, therefore, it cannot be a security, and besides, the company never marketed kin as an investment anyway.

You could almost go along with that, as long as you completely ignored this 2017 Youtube video of Kik’s CEO Ted Livingston telling everyone how rich they could become if they owned kin. “We’re gonna put [kin] inside Kik and it will become super valuable on day one, we think.” Oops! (Read the full coverage in The Block.)

Two “professional hacking groups” are behind the majority of publicly reported hacks of crypto exchanges and other cryptocurrency organizations, according to a crypto crime report published by blockchain data analytics firm Chainalysis. The two nefarious groups so far have raked in $1 billion of hacking revenues for themselves. Of course, even thieves don’t keep their holdings in bitcoin. They converted everything to fiat.

If you thought SingularDTV was a dreadful name, the blockchain entertainment company has come up with something even more bad. SingularDTV has changed its name to Breaker. The company has a new logo, too—a circle comprised of small lines swirling inward meant to represent the “the hive mind,” a type of groupthink that decentralized projects like to associate themselves with.

Breaker owns Breaker Magazine, which changed its name to BreakerMag to avoid confusion. To go along with the new branding, Breaker (we’re talking about SinglarDTV now) also released a cringe-worthy video that starts with a man gyrating his hips and saying, “It’s like this,” and then devolves into a woman ripping a pink beauty mask off her face. As if the name change wasn’t awkward enough.

Nicholas Weaver, a researcher at International Computer Science Institute, gave a talk at Enigma, a USENIX conference, called “Cryptocurrency: Burn it with Fire!,” where he argued the entire cryptocurrency and blockchain space is effectively one big fraud. Here are the slides to the presentation. The video is not up yet, but Weaver gave a similar talk in April 2018. (It’s funny, watch it.)

For a brief period, tether (USDT), the stablecoin associated with the crypto exchange Bitfinex, rose to become the fourth largest crypto by market cap at $2 billion. It has dropped back down to sixth place now, but who knows, maybe it will rise up again. (Read my tether timeline to learn why tether is so important to crypto markets.)

Banking giant JP Morgan says bitcoin is now worth less than the cost to mine it. “The drop in Bitcoin prices from around $6,500 throughout much of October to below $4,000 now has increasingly pushed margins further and further negative for just about every region except low-cost Chinese miners,” the bank’s analysts said. (Bloomberg)

Despite all the hype, decentralized exchanges (DEX) are not attracting much interest. According to a report in Diar, DEX volume is at an all-time low—something that’s unlikely to change, mainly due to poor usability issues. Another reason to avoid DEXs: anyone can list any token they like—even if it’s not a legitimate one.

the things u cld do with a fake ERC-20 token:– show as "collateral" or proof of reserves– sell on DEX to redeem for real $ETH– trade on your own exchange to pump your volume #'s (harder than 1, 2)

Binance has come up with yet another harebrained business scheme. The Malta-based crypto exchange now allows customers to buy crypto using their credit cards. I can’t see this working out too well. Banks generally distance themselves from all things crypto, and many won’t allow you to put crypto on credit cards. And even if they do, weird things happen. US-based crypto exchange Coinbase no longer accepts credit cards, but when it did, Visa actually overcharged buyers—though, it did eventually issue refunds.

An Italian bankruptcy court found Francisco Firano (aka “Francisco the Bomber”) personally liable for $170 million in losses related to the BitGrail hack in April 2018. (Last year, I wrote a story about the hack for Bitcoin Magazine.) The BitGrail Victims Group posted scans of the court documents along with an explanation of the court’s decision on Medium.

Apple cofounder Steve Wozniak, who used to go around comparing bitcoin to digital gold, admits he sold all his bitcoin at its peak. “When it shot up high, I said I don’t want to be one of those people who watches and watches it and cares about the number. I don’t want that kind of care in my life,” he said at the Nordic Business Forum. “Part of my happiness is not to have worries, so I sold it all and just got rid of it.” (Satoshi Times)

And finally, the police department in Lawrence, Kansas has been getting reports of bad actors calling people up at random to demand bitcoin.

Someone is calling people and pretending to be one of our sergeants and demanding bitcoin. First of all, no, second of all, just call him whatever names and profanities you want, then hang up. It’s not from us, pinky promise.

Kik is ready to go to battle. The Canadian social media startup has decided to take on the U.S. Securities and Exchange Commission (SEC). At issue is whether Kik’s digital token kin is a security.

Kik raised $47.5 million in September 2017 by selling kin in an initial coin offering, or ICO — though, Kikprefers to call it a token distribution event. That was after Kik pre-sold $50 million worth of kin to a group of 50 wealthy investors, mainly blockchain hedge funds. The presale was a simple agreement for future tokens, or SAFT, which is basically, a Reg Dexemption, where the investors would get the tokens at some point in the future after things were up and running.

What is kin? On itswebsite, Kik describes kin as a “digital currency” that you can use to “earn points for watching video ads, then use points for stickers and custom emojis.” Kin is different from other in-house loyalty points, because it “can be bought and sold for real money.” In other words, you could use it as a utility token in the Kik app and also trade it on crypto exchanges for other coins, like bitcoin and ether.

Kik initially announced its token sale in May 2017, four months ahead of its ICO. At the time, the company banned Canadians from taking part in its public sale, because the Ontario Securities Commission (OSC) had already deemed its token to be a security. But that didn’t stop Kik from opening its sale up to U.S. citizens.

Although Kik consulted with lawyers before its public ICO, as far as what I can read, it never actually reached out to the SEC for guidance. And it’s not like they weren’t given fair warning that this might pose a problem.

By mid-2017, the SEC had already begun its crackdown on ICOs. Two months prior to Kik’s ICO, the regulator issued an investigative report concluding that tokens sold by the DAO (a decentralized investment fund that ran on Ethereum) were securities. That report was a cautionary tale to any other project thinking about raising money in an ICO. In a public statement at the time, the SEC said:

“We encourage market participants who are employing new technologies to form investment vehicles or distribute investment opportunities to consult with securities counsel to aid in their analysis of these issues and to contact our staff, as needed, for assistance in analyzing the application of the federal securities laws.” [Emphasis mine.]

But instead of proactively reaching out to the SEC, Kik waited to hear from them.

The SEC first contacted Kik two days after Kik’s token offering began. “It was a friendly contact for information, which we happily responded to,” Kik CEO Ted Livingston wrote in a blog post. But from there the conversations “ramped up,” and on November 16, 2018, the SEC sent Kik and the Kin Foundation a Wells notice—essentially, a letter stating that the regulator was about to bring an enforcement action against them. On December 7, Kik sent back a 31-pageresponse.

As the SEC sees it, Kik is in violation of section 5 of theSecurities Act of 1933, which states that it is illegal to sell securities unless you register with the SEC or else apply for an exemption, such aprivate placement, which limits a sale to accredited investors—in other words, those who know the risks and can survive the loss, if things go wrong.

As mentioned, Kik’s private token sale was a Reg D exemption. (Here is the SEC filing from September 2017.) According to SEC rule 506 of Regulation D, purchasers receive “restricted securities,” meaning that the securities cannot be sold for at least six months to a year. Also, Reg D does not pre-empt something from being a security.

In general, the problem with SAFTs is that, for various legal reasons (see SEC rule 144), even after the holding period, you can probably only sell your coins to other accredited investors. In other words, you cannot freely trade those coins on the secondary market. Obviously, that limits kin’s usability. It also makes kin not a very good currency, because you can’t actually buy and sell it for real money—at least not that easily.

Anyone know if one is exempted from securities registration by offering to only a few accredited investors how the secondary market works?

The basic rule for determining wether something is a security is the “Howey test,” which states that a security is “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” In its response letter, Kik claims kin is not a security according to the Howey test, because Kik never marketed its ICO as an investment.

“Simply put, Kik did not offer or promote Kin as a passive investment opportunity. Doing so would have doomed the project, which could only succeed if Kin purchasers used Kin as a medium of exchange (rather than simply holding it as a passive investment). Accordingly, Kik marketed Kin, not as an investment opportunity, but rather as a way to participate in a fundamentally new way for consumers to access digital products and services, and for innovative developers, and their users, to be compensated for the value they provide.”

But Kik’s main rebuttal is that kin is a currency—so securities laws don’t apply.

“The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement… but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance.”

Lawyers will have to debate how to define kin. But just as the SEC’s Munchee order in December 2017 made it clear that simply calling a token a “utility token” does not unmake it a security, calling a token a “cryptocurrency” may prove equality as futile—especially, if the token doesn’t actually work as a currency.

QuadrigaCX customers are still waiting to get their funds. The Canada-based crypto exchange has been eerily quiet since reporting on January 14 that its CEO Gerald Cotten died in India—a month earlier.

Since then, the only sign of life has been a single tweet warning customers that another twitter account was fake.

This is bizarre. The only sign of life to come from Quadriga since announcing the death of company CEO 10 days prior, is a tweet saying that another Twitter account @Quadrigasupport is fake. https://t.co/2T6xj1e3Nc

Trouble began a year ago when the Canadian Imperial Bank of Commerce froze about $22 million in US dollars in an account opened by QuadrigaCX’s payment processor. The majority of the frozen funds were released in December, but customers still aren’t getting their money. In recent developments, one user on Reddit claims that he received $18,000. But several more of the exchange’s customers are complaining that their fiat withdrawals are being marked as completed with no money coming through.

My last Oct withdrawal marked Complete on Dec.27th while still not been received yet. A withdrawal of 0.25 Bitcoin on Jan. 21th is still pending. Very annoying!!! I am not able to withdraw any crypto or QCX bucks from the platform. Please do update what's going on.

Customers are unable to move crypto out of the exchange either. Some report that requests are simply left pending.

According to a petition submitted to the Supreme Court of British Columbia on January 22, QuadrigaCX was to hold a shareholders meeting on January 25 to appoint a new director. When Cotten died on December 9, he left the company with no officers, and no way to carry out its business. Still, it is not clear if that is what is holding up funds or if something nefarious is going on. Two days after the shareholders meeting, the exchange still hasn’t posted an update.

Crime, or in this case wash trading, doesn’t pay. Two executives at South Korean crypto exchange Komid are heading off to jail for faking volume, according to BlockinPress. Choi, the CEO, was sentenced to three years; Park, another executive, was sentenced to two years. Court documents say the faked volume led Choi and Park to earn $45 million.

Know-your-customer (KYC) data (ID cards, drivers licenses, and more) from several top exchanges, including Binance, Bittrex, Bitfinex, and Poloniex, appears to have surfaced on the dark web. Binance claims the data is not coming from its servers. Bitfinex also claims its databases have not been breached.

We want to assure our customers that Bitfinex is aware of this situation and can confirm there is no security breach to our platform. As always, if there are any queries please get in touch with our support team – https://t.co/YslE5GtSGThttps://t.co/VeW08TqgWn

Since the markets crashed, crypto exchanges are looking for ways to boost their profits. To that end, Coinbase announced that is expanding its institutional trading services to Asia. The San Francisco-based exchange also now supports SWIFT wire transfers that will allow clients in Asia to fund their accounts from banks based outside the U.S.

Immutability (aka “be your own bank”) has been a big selling point for blockchain. But it also makes mistakes especially painful. Korean crypto exchange Coinzest (not to be confused with Coinnest, a separate exchange) accidentally airdropped $5.3 million worth of bitcoin and other crypto to its customers.

Polkadot, a project founded by former Ethereum CTO Gavin Wood, aims to solve the problem of blockchain interability. (If you’re not sure what that means, Wood tries to explain it here.) In October 2017, Polkadot raised $145 million worth of ETH in an ICO. Shortly after, $98 million of those funds became frozen due to a bug in Parity wallets, another Wood project. But that’s okay, because you can always get more funding.

In fact, earlier this month, Ethereum gave Parity Technologies, the umbrella company that Parity and Polkadot fall under, a $5 million grant. (Read this Reddit thread to get a sense of how the community felt about that.) Now Polkadot is reportedly looking to raise $60 million through another ICO, according to the Wall Street Journal. Polkadot still does not have a working product.

After one year of serving as CEO of decentralized media platform po.et, Jarrod Dicker has stepped down and returned to the Washington Post. Po.et allows journalists to create time-stamped titles for their work on a blockchain. The problem is, creating archives of our work is not a problem we journalist have. (I mean, there are lots of services that do that, and most of them are free.) Rather, it appears to be just another thinly veiled excuse for launching an ICO. Po.et raised $10 million in August 2017.

Crypto lawyer Stephen Palley reports on the latest developments in the Tezos class action suit for The Block. In support of “yeah, this was a securities offering,” plaintiffs in the case cite emails from Tezos CEO Kathleen Breitman with securities-like wording. Oops! Tezos raised $232 million in an uncapped ICO in June 2017. The project has gotten criticism for raising above and beyond what most startups need to launch a business.

Galaxy Digital, the crypto merchant bank launched by former hedge fund manager Michael Novogratz, is reportedly raising $250 million for a credit fund aimed at helping needy crypto firms, according to Business Insider. If you are curious about how Novogratz got into crypto (hint: he was Ethereum co-founder and crypto billionaire Joe Lubin’s roommate at Princeton), read this New Yorker piece from April 2018.

Bitcoiners don’t like to pay taxes. Some crypto folks are getting riled up about Senator Elizabeth Warren’s proposed wealth tax, calling it “theft.” Warren wants to levy a 2 percent tax on assets over $50 million and a 3 percent tax on assets over $1 billion.

Mike, a wealth tax is insane and criminal. It's literally nationalizing the wealth of the elite and letting it decay into the world's largest war machine. Class warfare, envy and communism have no place in American politics. We ought to be better than this

Kyle Gibson, a crypto enthusiast and avid researchers who lives in Boston has pulled together a wealth of information on the Texas Department of Banking Memo 1037 and what it could mean for crypto, beyond stablecoins and their issuers. It is worth a read.